The official number for employment suggested a loss of 63,000 jobs. But could it have been more like 200,000? And I will make a case for 2,000,000 lost jobs last month. This week we will take a look at the confusing labor-market picture in the US. We will also look at the debate over the money supply. Is the Fed increasing the money supply at a reckless rate, fueling inflation fears down the road? All this and a lot more as we look at how the recession in affecting everyone and everything, from individuals to large businesses. (The letter will print a little long, but there are a lot of charts.)

This week's letter is triggered by an amusing (but very flattering) note from a reader. Matt M. wrote:

"John, you have been my rock for the last few years. Will this decline be equal to the 1970's, the 1930's or the 1900's when we had a similar wealth disparity? I must use a line from Star Wars, 'Help me Obi-John, you're my only hope.'"

This week's topic was inspired by a discussion I had with George Friedman of Stratfor fame last night. He was suggesting the recession would be short and steep, and I of course think it is going to be shallow and with a long, protracted, and slow Muddle Through recovery. And it all hinges on how the Fed thinks about inflation.

There is considerable angst in the press about inflation and recession conspiring to bring us to a repeat of the 1970s woes of stagflation. And the economic data can certainly be interpreted as warranting such concern. This week we look at several different definitions of inflation. How can the Fed (in the form of both Fed chairman Bernanke and governor Kohn giving quite dovish presentations) dismiss inflation? Aren't they supposed to make sure that prices are stable? Just look at their European counterparts who talk tough on inflation and then "walk their talk."

There are those who suggest the Fed should do the same. There is no easy answer, but I will try to lay out the conflicting concerns and explain why the Fed is going to cut and cut again, as I have been writing for months. Let's put on our thinking caps, gentle reader, as we delve into some arcane but very important lessons.

It had been my original intention to devote this week's letter to the view from Europe, as I have been here for the last week, but events have changed that goal. The Federal Reserve made a very rare inter-meeting rate cut of 75 basis points this week, after the worldwide markets were in turmoil. Many pundits suggest the Fed was responding to the worldwide collapse in stock prices. This week we examine that suggestion, and I will offer an alternative explanation. I am beginning this letter in a London subway train. Quickly, the consensus wherever I go seems to be that Europe and the United Kingdom are also headed into recession. There is a lot of interesting ground to cover, so let's get started.

But first, I want to make a quick correction from last week. I do know the difference between monocline (a set of rock layers that all slope downward from the horizontal in the same direction) and monoline (a business that focuses on operating in one specific financial area). However, Microsoft Word doesn't. I *think* I had it right in the original version of the letter, but when I sent it to my editor, the word monoline was "helpfully" changed automatically to monocline. As we will be mentioning the monoline companies again this week, let's hope we can get it right.

After a wild week in the markets, there is so much to write about, it is hard to know where to start. The headline number says jobless claims fell 20,000. That would be good news, if it were true. Sometimes you need to look behind the curtain to see how these statistics are made. As we will see, claims were actually up by 26,000. I wrote in my annual 2008 predictions that the big story of the year would turn out to be credit default swaps and counter-party risk. I will admit to thinking it would take more than a few weeks for that to happen. And the Senate is hampering the ability of the Fed to work, and doing so for blatant political purposes, in an effort to reduce the independence of the Fed. There is that and a lot more to cover in what should be an interesting letter.

But first, let me briefly mention my upcoming 5th annual Strategic Investing Conference (co-hosted with my US partners Altegris Investments). It will be April 10-12 in La Jolla, and is shaping up to be the best conference we have ever done. Paul McCulley, Louis Gave, Rob Arnott, George Friedman of Stratfor, and several more well-known names who I expect will commit this next week are on tap, as well as some of the smartest hedge fund managers I know. Find out how these guys are taking advantage of the volatility in what is clearly becoming a bear market, and what you can do to join them.

Although it frustrates me, we have to limit attendance to investors with a net worth of more than $2,000,000, for regulatory reasons. Invitations will be sent out soon. If you would like to go and have not signed up for my free accredited investor letter, you can go to www.accreditedinvestor.ws and sign up. One of my partners from around the world will contact you. (Again, for regulatory reasons we have to talk with every individual who plans to attend, as private offerings and hedge funds will be presented, and we have to make sure that the legal requirements for such presentations are met.)

From ghoulies and ghosties
And long-leggedy beasties
And things that go bump in the night,
Good Lord, deliver us!

-Traditional Scottish Prayer

It's been a long time since we have looked in my worry closet, but there are definitely bumping sounds coming from behind the door. While largely over-looked, Bank of America closed down an "enhanced cash" fund and did the unthinkable and broke the buck. But the real story is even worse. I make the suggestion that you look at your cash funds and see what is in its portfolio. You may want to redeem ahead of the crowd.

The markets rebounded strongly this week, bouncing off a 10% drop in the previous weeks. Is it a signal of renewed economic vigor? Or is it a dead cat bounce? This week we take a look at problems at the edge of the economy which threaten to derail not only the recent robust growth (at least in the statistics) but also the markets. And we start with a personal story which I think will help us understand the current situation. Stay with me here.

Last Thursday, we sat down for a massive Thanksgiving dinner at my 21st floor apartment in Dallas. All seven kids, my 90-year-old mother, and an assortment of friends and relatives (about 15 of us) started to work on a 16-pound prime rib, 18-pound turkey, and massive amounts of potatoes, mushrooms, and lots more. Grace was said, the wine was poured, and we were feeling good about life.

And then about 15 minutes into the meal, the fire alarm went off, telling us to evacuate. This was annoying, as it seemed like we have had a false alarm at least once every few weeks in the past few months. So, we did what we have done in the past and ignored the alarm. After all, this is a modern structure (only 4 years old) with fire sprinklers everywhere. We assumed that someone had a grease fire in their kitchen that would quickly be put out.

The economy added 166,000 new jobs last month, almost double the average estimate. GDP for the US came in at a blowout 3.9% growth, well above trend. The Fed cut its rate by another 25 basis points, but many observers see language in the accompanying statement which they think suggests the Fed is done with cutting, at least for now, as the economy appears stronger.

But appearances can be deceiving. This week I lay out a partial case for why the Fed will cut again and yet again (all the reasons would take a book). There are good reasons to doubt the jobs number, but unless you get into the details of how the number is created, you might never know. "Laws are like sausages, it is better not to see them being made," said Otto von Bismarck in the late 19th century. I would add to that list government statistics. While this week's letter may not be for the squeamish, we are going to look into how the sausage of the jobs report is made.

And in response to some questions from the recent survey we took, I finish with a few thoughts on the biases I have in writing this letter.

The dollar reaches new lows. The housing market shows no sign of a bottom. Oil almost touches $84 before backing off. Interest rates go up after the Fed cuts. So naturally the stock market keeps climbing. But then, consumer spending came in strong, employment looks like it may be ok, inflation (at least by one measure) came in below 2%. This week we look at the question of whether you could have a continued bull market and a recession. (Maybe.) We look at the bigger picture for the dollar and interest rates and examine the ugly data from the housing sector. Inflation or deflation?

But before we get started into what should be an interesting letter, let me thank those who completed my reader survey last week. Over a thousand of you gave specific comments and I looked at every one. If you didn't take the anonymous survey yet, but would like to, just click this link. All I really know about 99.9% of my readers is an email address. The survey is just a few questions which gives me an idea of the audience I am writing to and some feedback on how I'm doing. And feel free to make comments at the end in the space provided.

As my gift to you for taking the time, when you finish the survey you will be given a link to the audio of a speech by Dr. Mike Roizen, the author of You, The Owner's Manual and a dozen other blockbuster best-sellers. He spoke at my Strategic Investment Conference this spring (co-hosted by Altegris Investments) on "How to Stay Young - Getting Your Body to Give You a Do-over." (If you can't listen when you finish the survey, save the link.) Thanks.

"Of his bones are coral made:
Those are pearls that were his eyes:
Nothing of him that doth fade,
But doth suffer a sea change
Into something rich and strange"
(The Tempest - Shakespeare)

The term "sea change" has come to mean a profound transformation ever since Will Shakespeare used it in The Tempest. I think this week we witnessed a true sea change in central bank policy, on both sides of the Atlantic. The stock market rejoiced over a 50 basis point cut from the Fed, assuming that it will stimulate growth and avoid anything more than a slowdown. In this week's letter, we ponder several questions. Why did the Fed decide to cut now when the rhetoric of just a few weeks ago was that of inflation fighting? What do they see? Are more rate cuts coming? Will they make any difference? And who is Frederic (Rick) Mishkin and why is he maybe the most important Fed governor you haven't heard of? There's a lot of ground to cover, and it should make for an interesting letter.

But first, I need to acknowledge an anniversary of sorts. Some seven years ago I put this e-letter on the internet, with (maybe) 2,000 names to send it to. Today, it goes out every week to more than 1,000,000 readers and is posted on scores of web sites and blogs. I have to confess with being a little (well, a lot) amazed by it all. It has changed my business practice in ways that I could not imagine seven years ago, and all for the better. Someone asked me what I will do when I retire. I told them I would read, write, travel and speak, which is pretty much what I do now, along with a few extra duties here and there.

But it is a great life and I want to thank you for allowing me to come into your home or office, and for recommending this letter to friends, which is the way the readership has grown. And because I want to keep writing for a long time and I want to keep you as a reader, I am going to make available to you a speech on how we can all live longer by Dr. Mike Roizen, who wrote You - The Owner's Manual (and You - On a Diet , and the other monster best-sellers in the series). He also appears on Oprah about six times a year. I am lucky enough to call him both friend and my doctor.

"A similar effect is taking place in economic life. I spoke about globalization in Chapter 3; it is here, but it is not all for the good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks (often Gaussianized [bell curve] in their risk measurement)-when one falls, they all fall.

The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur...I shiver at the thought. I rephrase here: we will have fewer but more severe crises. The rarer the event, the less we know about its odds. It means that we know less and less about the possibility of a crisis." (Nicholas Nassim Taleb, The Black Swan, p. 225, probably and presciently written last year.)

How predictable was the current turmoil in the market one year ago? Six months ago? On one level, it was not all that hard to see that that there were going to be problems in the subprime mortgage market, especially in the BBB tranches (or portions) of Mortgage Backed Securities which were rolled up together into Collateralized Debt Obligations and given AAA ratings. Saying that there would be massive losses distributed throughout thousands of institutional portfolios was almost a given. I was not the only one writing about the problems that awaited us.